Inflation is the year’s hot topic in the U.S. — and for good reason. It’s impacting everyone! That said, understanding what causes inflation in America can help consumers and business leaders plan how to address it properly.
What Drives Inflation?
Inflation is typically a byproduct of two:
High production costs: High production costs cause cost-push inflation. This means the costs of producing goods increase while demand remains the same. For example, COVID-19 caused labor shortages in lumber mills and manufacturing. While demand for products rose or stayed the same, manufacturers had to increase prices to meet labor needs and passed those costs on to consumers. The result was increased costs for consumers.
Higher Consumer Demand: Inflation also occurs when there is strong consumer demand for products. This causes demand-push inflation. High wages and low unemployment can increase demand-push inflation. Because Covid-19 led to a labor-force restructuring, leading to higher wages and aggressive spending, prices were pushed upward. Even in typical situations, higher consumer demand can push prices up, but when it works hand in hand with higher production costs, the two effects can amplify each other.
So, Is Inflation Good or Bad?
Perspectives on inflation are largely situational and depend on lifestyle and inflation’s day-to-day impact. Here is an overview of how inflation causes winners and losers:
The Bad:
For many people, inflation is a stressful phenomenon — their dollar simply doesn’t go as far as it once did. Families feel this strain the most because the costs of food, gasoline, and household products each rise. Individuals who consume less may be able to make more adjustments and have flexibility.
In the commercial world, inflation can also cause a stress point. Companies that price their products must consider how much cost they can pass on to consumers and their product demand. It becomes a balancing act of maintaining profitability while not eliminating appetite for their products.
The Good:
Inflation does produce some winners. Those who invest in inflation-hedged items such as commodities, gold, stocks, and Treasury-Inflation Protection Securities may see magnified returns during high inflation environments.
Businesses that provide necessities likely will see sustained demand for their products and have higher profit margins during inflation periods. Similarly, those with inflation-adjuster clauses to the payment schedules of their contracts can offset costs and maintain a stronger position in the marketplace.
Manage How Inflation Impacts Your Daily Life
Because the effects of inflation are universal, nearly everyone can benefit from a meaningful review of their financial picture. Embrace these core strategies to secure your financial situation:
Re-examine your budget. A disciplined budget can help individuals and businesses, navigate this high-inflation environment. Focusing on cutting expenses like subscriptions and eating out for individuals can yield savings for individuals. Businesses can seriously assess their real estate needs, review their service contracts, and consider what provides true value.
Continue to eliminate debt. With a tighter budget, it is more important than ever to avoid the costs of borrowing money. Those without debt should budget as much as possible, and build an emergency fund, to avoid needing loans. Those with loans should make an aggressive debt repayment plan.
Invest wisely. Consumers and business leaders should consider allocating a portion of their portfolio to inflation-resistant and advantaged investments. Working with a professional who can suggest portfolio structures that continue to provide strong returns in challenging environments can provide options and peace of mind.
Nearly everyone has felt theeffects of inflation in 2022. Consumers and business leaders should reach out to knowledgeable financial professionals and discuss how they can manage inflation’s challenges and use inflation to their advantage.
Bell Finance is here to help guide you through your day-to-day finances and set you up for a more stable future. Contact us today to learn more!
